AI disruption fears trigger $611 billion software market selloff, rattling Wall Street

AI Fear Grips Wall Street as a New Stock Market Reality Sets In

For months, investors have been growing increasingly anxious about how artificial intelligence will potentially transform the economy. Last week, those concerns suddenly spilled over into the stock market. The culprit was AI startup Anthropic, which released new tools designed to automate work tasks in various industries, from legal and data services to financial research. The announcements sparked fears that the innovations would doom countless businesses. In response, investors dumped a broad range of stocks, from Expedia Group Inc. to Salesforce Inc. to London Stock Exchange Group Plc. By Friday, dip buyers stepped in, helping the widely followed iShares Expanded Tech-Software Sector ETF, better known by its ticker IGV, rebound from its 12% decline over the previous four sessions. But for bleary-eyed Wall Street pros, rattled by days of volatile trading, the message was clear: This is the new reality. "Things are shipping out weekly, daily," said Daniel Newman, chief executive officer of the Futurum Group. "The blast radius of companies that could be impacted by AI is going to grow daily." Anthropic AI Tool Sparks Selloff From Software to Broader Market Even with the end-of-week rebound, the damage was severe. Thomson Reuters Corp.'s Canada-listed shares plunged 20% on the week, their steepest fall ever. Financial research firm Morningstar Inc. posted its worst week in the stock market since 2009. Software makers HubSpot Inc., Atlassian Corp. and Zscaler Inc. each tumbled more than 16%. All told, a collection of 164 stocks in the software, financial services and asset management sectors shed $611 billion in market value last week. (Bloomberg LP, the parent of Bloomberg News, competes with LSEG, Thomson Reuters and Morningstar in providing financial data and news. Bloomberg Law sells legal research tools and software.) AI's disruptive potential has been a topic of conversation since the debut of OpenAI's ChatGPT in late 2022. But until last week, most of the attention has been on the winners. With hundreds of billions of dollars being spent to beef up computing capacity, investors eagerly bought the shares of companies considered beneficiaries of the largesse, from chipmakers and networking firms to energy providers and materials producers. That strategy has paid off handsomely. An index that tracks semiconductor-related stocks has more than tripled since the end of 2022, compared with a 61% advance for IGV and an 81% jump in the S&P 500 Index. While the so-called pick-and-shovel trade is still winning, the rapid pace of new tools being brought to market by startups like Anthropic and OpenAI, as well as Alphabet Inc.'s Google, is making the long-theorized disruption seem much more imminent. In just the past month, Google roiled video-game stocks with the release of a tool that can create an immersive digital world with simple image or text prompts. And another Anthropic release, a work assistant based on its Claude coding service, sent software stocks tumbling. 'No Reasons to Own': Software Stocks Sink on Fear of New AI Tool The developments added to angst fueled by a set of disappointing earnings reports from software makers late last month. The biggest was Microsoft Corp., which lost $357 billion of market value in a single day after slowing revenue growth in its cloud-computing business fanned anxieties about heavy spending on AI. ServiceNow Inc. sank 10% and SAP SE tumbled 15% following similarly lackluster results. "It was the stalwarts that failed us," said Jackson Ader, a software analyst at KeyBanc. "If your results and your guidance aren't up to snuff, it's kind of like: What confidence should we have for the rest of the sector?" Get the Bloomberg Deals newsletter. Get the Bloomberg Deals newsletter. Get the Bloomberg Deals newsletter. The latest news and analysis on M&A, IPOs, private equity, startup investing and the dealmakers behind it all, for subscribers only. The latest news and analysis on M&A, IPOs, private equity, startup investing and the dealmakers behind it all, for subscribers only. The latest news and analysis on M&A, IPOs, private equity, startup investing and the dealmakers behind it all, for subscribers only. Bloomberg may send me offers and promotions. Plus Signed UpPlus Sign UpPlus Sign Up By submitting my information, I agree to the Privacy Policy and Terms of Service. While plenty of new names were bruised last week, few have been punished to the extent of traditional software makers, which have been under pressure since last year. Salesforce, which owns the popular team collaboration service Slack, is down 48% from a record high in December 2024. ServiceNow, which makes software for human resources and information technology operations, has dropped 57% since hitting a peak in January 2025. "I suspect some companies will endure, embrace AI, and prosper, but others will see permanent disruption to their business models or prospects," said Jim Awad, senior managing director at Clearstead Advisors. "It is very hard to know which is which right now." That fear has investors running for the exits. Software is by far the most net-sold group among all sectors since the start of the year, according to Goldman's prime brokerage desk data. Hedge funds' net exposure to software hit a record low of less than 3% as of Feb 3, down from a peak of 18% in 2023. However, there's little fundamental evidence of deterioration. In fact, in the eyes of Wall Street analysts, the outlook for profits is improving. Earnings for software and services companies in the S&P 500 are projected to rise 19% in 2026, up from projections for 16% growth a few months ago, according to data compiled by Bloomberg Intelligence. "Everyone is assuming the bottom is going to fall out, in terms of operating metrics. I'm skeptical about that," said Michael Mullaney, director of global market research at Boston Partners. "It could end up that profits and margins are fine, even if there is disruption. If I were a growth manager, I'd be buying the dip." The relentless selling has pushed software stocks deep into territory where technical-minded traders typically expect a rebound. The 14-day relative strength index on the iShares ETF hit 15 on Thursday, the lowest level in almost 15 years, and is around 24 now. Anything below 30 is considered oversold. Meanwhile, valuations keep getting cheaper. A basket of software stocks tracked by Goldman Sachs sank to a record low of 21 times estimated profits, down from a peak of more than 100 in late 2021, according to data compiled by Bloomberg. Salesforce is trading at 14 times profit expected over the next 12 months, compared with an average of 46 over the past decade. "We continue to test the valuation floor and then blow right through it," KeyBanc's Ader said. "People are gun-shy and skittish to say that these stocks are too cheap, because based on historical multiples you could have made that argument at every point for many many months now, and it wouldn't have helped you one bit."

How a software meltdown will shake private markets

LONDON, Feb 5 (Reuters Breakingviews) - Public market investors are freaking out about artificial intelligence. Yet the pain may be even more dramatic in the worlds of private equity and credit. Buyout barons and direct lenders -- think of Vista Equity Partners, EQT (EQTAB.ST), opens new tab, Thoma Bravo, Blackstone (BX.N), opens new tab, KKR (KKR.N), opens new tab, Ares Management (ARES.N), opens new tab and Blue Owl Capital (OWL.N), opens new tab -- have spent years stuffing software companies and loans into their funds. An AI reckoning could get very messy very quickly. Shares in listed software groups are reeling over fears that new AI tools, from developers like Anthropic, may eat incumbent products that handle enterprise tasks including expense management. The BVP Nasdaq Emerging Cloud Index (.EMCLOUD), opens new tab, which includes names like Workday (WDAY.O), opens new tab and Salesforce (CRM.N), opens new tab, is down 14% since last Monday. Its constituents, excluding positive outlier Palantir Technologies (PLTR.O), opens new tab, now trade with a median forward EBITDA multiple of at about 16, according to a Breakingviews analysis of LSEG Datastream figures. That compares with a multiple of 22 at the start of this year, and roughly 30 just before OpenAI released ChatGPT in late 2022. Debt prices tell a roughly similar story, at least in the widely traded syndicated loan market, which is distinct from the more opaque private credit world. PitchBook reckons that the volume of loans trading below 80% of face value, a sign of deep financial stress, has more than doubled since the end of December, to $25 billion. Software loans account for nearly a third of all so-called distressed credit in these liquid markets, PitchBook reckons. All of this implies steep losses in private markets. Software companies were a popular choice for buyout barons after the pandemic, egged on by seemingly sticky customer relationships and cheap debt. Data from Bain & Co. shows that in 2021 alone, software buyouts amounted to $256 billion, or more than a fifth of the total. Marquee transactions included Thoma Bravo's $6 billion take-private, opens new tab of Medallia, or Vista's $3.9 billion acquisition of education group Pluralsight, which has already been taken over by creditors. In many cases, the debt funding came from direct lenders, who are likely still exposed. A Kroll StepStone benchmark covering $835 billion of U.S. private credit contains some $180 billion worth of IT sector debt, or 22%. Dealmaking certainly got toppy in the post-pandemic boom. On average, software buyouts were struck at enterprise value to EBITDA multiple of over 20 in 2021, and carried debt equivalent to around 10 times EBITDA, per PitchBook figures. Leverage moderated slightly after that heady peak, with borrowing for new deals averaging 7 times EBITDA between 2022 and 2025. Imagine a hypothetical company with EBITDA of $100 million in 2021. If acquired at 20 times EBITDA, with 7 times leverage, the initial equity would have been $1.3 billion, against $700 million of debt. Next assume that EBITDA is on track to grow to $150 million by the end of 2026, equivalent to a healthy 9% annual rate, and that the debt still remains. If the valuation multiple had halved, in line with public markets, the theoretical equity value would be down 40% to $800 million. If a fair multiple is more like 5 times, in line with some of the more distressed public software names, then the equity would be nearly wiped out and lenders close to facing losses. UBS analysts estimate that the default rate for private credit could jump by up to 8.5 percentage points in a scenario of rapid AI disruption. One risk is that investors, fearing this scenario, pull money from semi-liquid private credit funds. Some vehicles, including those known as business development companies (BDC), allow backers to withdraw a portion of their funds every three months. They've been sold to individual investors, who may arguably be less sophisticated and more prone to panic. Blue Owl Technology Income, one such BDC, had redemption requests equivalent to 15% of its shares in the fourth quarter of last year, despite a strong track record. While Blue Owl was able to honour the redemptions, a wider run on those vehicles could force funds to gate investors or even sell assets, which would depress prices further. That would have a knock-on effect to other vehicles like collateralised loan obligations (CLOs), which slice and dice debt into different tranches for buyers like insurers. When a certain percentage of CLO assets are downgraded below B-minus, which in the credit-rating world signals a higher risk of failure, the vehicles can be forced to shut off cash payments to some investors. The net effect may be to drive up borrowing costs, and choke off funding for future buyouts. That fallout is not yet apparent. U.S. companies rated single-B, the second sub-investment grade rung, on average have to pay some 310 basis points more than risk-free rates to borrow in bond markets, per ICE Bank of America indexes. That's up some 30 basis points since the last week of January. But it's still roughly in line with the two-year average. That narrow extra return, however, means there's plenty of scope for financing conditions to worsen as the AI fallout spreads. Follow @Unmack1, opens new tab on X Editing by Liam Proud; Production by Streisand Neto * Suggested Topics: * Breakingviews Breakingviews Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time. Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on X @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors. Neil Unmack Thomson Reuters Neil Unmack is a Reuters Breakingviews Associate Editor based in London. He covers credit markets, hedge funds, and Italy. Previously he was a corporate finance reporter at Bloomberg News in London. He started his career as a financial journalist in 2001 at Euromoney Institutional Investor, where he covered structured finance for EuroWeek magazine. He was educated at Eton College and Oxford University, graduating with a first class degree in modern languages.

Blackstone Is Finalizing $3.5 Billion Loan for Australia AI Firm

Private credit giant Blackstone Inc. is finalizing a loan of more than A$5 billion ($3.5 billion) to fund the data center expansion of Australian startup Firmus Technologies Pty., people familiar with the matter said, the latest in digital infrastructure funding tied to the AI boom. The completion of the deal could be announced as soon as next week, the people said, who asked not to be identified discussing private matters. The financing comes amid a broader selloff in technology stocks this week as investor concerns over surging AI-related spending prompted a pullback. Despite looming concerns, investment in data centers to support AI growth is projected to top $3 trillion, much of it debt-funded. Earlier this week, a KKR & Co.-led consortium announced a S$6.6 billion ($5.2 billion) acquisition of data center operator STT GDC Pte., backed by a loan of around S$5 billion. Representatives for Blackstone and Firmus declined to comment. Read more on private credit in Asia Pacific: Goldman, Blackstone to Fund $976 Million Loan for Pharma Buyout AllianzGI, NEC Capital Join EdgePoint's $475 Million Loan Hong Kong Property Bets Grow as Private Credit Fund Doubles Down Firmus signed an agreement last year with CDC Data Centers Pty. to develop data centers of as much as 1.6 gigwatts across Australia by 2028, powered by Nvidia Corp. chips, according to a company press release. On Thursday, it announced the entry of a new investor, following a A$830 million raised in two earlier funding rounds. Boutique advisory firm Highbury Partnership is advising Firmus on the debt financing, people familiar said. The Australian Financial Review first reported on Blackstone's financing role. A new AI automation tool from Anthropic PBC sparked a $285 billion rout in stocks across the software, financial services and asset management sectors on Tuesday as investors raced to dump shares with even the slightest exposure. A Goldman Sachs basket of US software stocks sank 6%, its biggest one-day decline since April's tariff-fueled selloff, while an index of financial services firms tumbled almost 7%. The Nasdaq 100 Index fell as much as 2.4% at one point before trimming losses to 1.6%. The selloff started before the US market opened as traders pointed to a release on the Anthropic website as the reason behind steep declines in the shares of credit and marketing services company Experian Plc, business and legal software maker RELX PLC and the London Stock Exchange Group Plc. Asian software stocks also slid, with shares of Indian information technology companies the latest to buckle. Bellwether Tata Consultancy Services Ltd. sank as much as 6%, while Infosys Ltd. dropped 7.1%. Cloud-based accounting software maker Xero Ltd. fell as much as 16% in Sydney trading, the most since 2013. Asia's broader tech sector showed some resilience as it remains dominated by hardware makers -- particularly chipmakers -- that have been key beneficiaries of the AI investment boom. Explainer: What's Behind the 'SaaSpocalypse' Stock Plunge? Thomson Reuters Corp. and Legalzoom.com Inc. were among the worst performers in the US and Canada, pushing the iShares Expanded Tech-Software Sector ETF down 4.6%, its sixth consecutive day of declines. The ETF is coming off a 15% plunge in January, its worst month since 2008. "This year is the defining year whether companies are AI winners or victims, and the key skill will be in avoiding the losers," said Stephen Yiu, CIO of Blue Whale Growth Fund. "Until the dust settles, it's a dangerous path to be standing in the way of AI." Shares of business development companies were caught in the selling, with Blue Owl Capital Corp. falling as much as 13% for a record ninth-straight decline that dragged the stock to the lowest since 2023. Fears of disruption have rattled credit globally, sending software loans in the broadly syndicated market lower last week. As publicly traded entities, BDCs provide a real-time window into the otherwise opaque direct-lending market. Ares Management Corp., KKR & Co. and TPG Inc. each fell by more than 10% at one point, while Apollo Global Management Inc. and Blackstone Inc. dropped by as much as 8%. Anthropic is part of a rash of AI startups developing tools for the legal industry. Long before Anthropic's plugin, startups including Legora and Harvey AI were flooding the legal industry with tools they say will save lawyers from grunt work. Investors have been pouring money into AI products for the legal industry for more than two years. Harvey AI was valued atBloomberg Terminal $5 billion in June, and Legora raised funds at a $1.8 billion valuation in October. Anthropic stands in contrast, however, in that it builds its own models that can be customized for an industry's specific needs. Its position in the AI ecosystem as a major model developer gives it the unique advantage of disrupting both traditional legal news and data services as well as legal AI upstarts. Firms like Legora rely on the underlying models from developers like Anthropic. On its website of plugins, Anthropic included a legal tool that it says can automate work like contract reviewing and legal briefings. "All outputs should be reviewed by licensed attorneys," according to the website. "Anthropic launched new capabilities for its Cowork to the legal space, heightening competition," Morgan Stanley analysts including Toni Kaplan wrote in a note on Thomson Reuters, the provider of business and legal information. "We view this as a sign of intensifying competition, and thus a potential negative." Another Anthropic release in January -- of its Claude Cowork tool -- boosted jitters for investors who have been monitoring the software sector for AI-related risks to its businesses for months. Other companies have also released products exacerbating the selloff; video-game stocks were caught up in the slide last week after Alphabet Inc. began to roll out Project Genie, which can create immersive worlds with text or image prompts. There are other signs that software companies are lagging their tech sector peers. So far this earnings season, just 71% of software companies in the S&P 500 have beaten revenue expectations, according to data compiled by Bloomberg. That compares with 85% for the overall tech sector. Bloomberg LP, the parent of Bloomberg News, competes with LSEG and Thomson Reuters in providing financial data and news. Bloomberg Law sells legal research tools and software.

Private Capital Titans Rush to Defend Software Companies as AI Rout Deepens

Despite their efforts to calm investor nerves, shares of large alternative asset managers took another dive, with some executives acknowledging that the perception of risk can make sponsors less likely to support their businesses and make refinancing loans more difficult. High finance's new ultra-rich lined up one by one, in TV spots, earnings calls and LinkedIn posts, to make the same pitch: Don't take out big AI fears on private credit funds. Blue Owl Capital Inc. billionaire Marc Lipschultz insisted that there were no "red flags" -- or even "yellow flags" -- in the firm's technology loans, speaking on an earnings call Thursday after an unprecedented losing streak for its shares. Scott Nuttall at KKR & Co. similarly told analysts that "our level of anxiety is pretty low." Mike Arougheti, the billionaire chief executive of Ares Management Corp., vowed on Bloomberg TV that "there is a huge disconnect, and the narrative is wrong" around artificial intelligence and the potential disruption it may cause. And Holden Spaht, managing partner at Thoma Bravo, said in a LinkedIn post that after a week of board meetings with software-as-a-service companies, he's confident that "the growth numbers look to be accelerating, not decelerating." Their defense boils down to this: There are good software companies and bad ones -- and we back the good ones. Whether the concerted effort to calm investor nerves will ultimately work is anyone's guess. Shares of large alternative asset managers took another dive on Thursday, capping a bruising stretch that added to their worst January in a decade. The $1.7 trillion private credit industry has ballooned in recent years, minting fortunes for its leaders. A sizable chunk of those loans -- some $100 billion as of the third quarter, according to PitchBook data -- went to software companies, oftentimes at lofty valuations. Those are the very businesses that are now in the crosshairs of investors amid concerns that AI will decimate their offerings. The fallout in the loan market has been swift. More than $17.7 billion of US tech company loans in a Bloomberg index have dropped to distressed trading levels during the past four weeks, adding to the biggest pile in more than three years. Another pillar of private credit's defense: This kind of broad selling is when we can buy on the cheap. "I certainly might expect that the broadly syndicated market will have a hard timeBloomberg Terminal providing financing for some software businesses," Kort Schnabel, CEO of Ares Capital Corp., said on an earnings call Thursday. "We might be excited to provide that type of financing to the very best of those companies." Equity Cushion Private lenders have emphasized their position in a company's capital structure, saying that their equity cushions, nearing around 70% in some cases, would have to be fully impaired for them to see significant losses. They also reiterated that all they need is to get paid back. But even the perception of risk can make sponsors less likely to support their businesses, making refinancing loans more difficult. The acceleration of AI also means that outcomes of software businesses will diverge, making recoveries worse for some than previously modeled. Time, too, is not on lenders' sides. A report by Barclays found that almost half of software exposure from business development companies is set to mature in four years or later, accounting for around $45 billion of loans. Among lenders, a Sixth Street business development company and a Blue Owl BDC have the highest exposure to longer-maturity software loans, it said. "Having a software portfolio with longer duration, however, potentially exposes the lender to a much more difficult refinancing if AI disruption risk grows with time and impairs software valuations even more," Barclays analysts wrote. Shares in BDCs and alternative asset managers traded down this week over fears around AI disruptions. "This is not just a market tantrum," said David Golub, CEO of Golub Capital BDC. "Nobody really has all the answers here. This is a new technology, and it's been moving at a pace that even experts in the field have not expected." 'Misunderstanding' Shares in Ares tumbled Thursday in the broader selloff, even as the firm reported that it ended the fourth quarter with record assets. Arougheti said during an interview on Bloomberg TV that people are misunderstanding how senior and safe many firms are, given that the financings under discussion are largely senior-secured loans. "What the market is missing is how attractive these loans have been," he said. Like its rivals, software was a major topic on an earnings call for one of its BDCs, Ares Capital Corp. -- with the word mentioned some 57 times. The BDC has around 24% of its assets exposed, the firm told investors. Executives said they feel "very good" about their software book, adding that they have an in-house AI team to evaluate investments. Executives at Oaktree Specialty Lending Corp., which has around 23% of the fund in software assets, told investors that they've been passing on more deals due to software risk and triaging their credits exposed to AI, including developing AI scorecards. "It's too early to actually see performance degradation in any software names, and it's probably going to take a fair bit of time to actually see any sort of dispersion in performance due to AI or a disruption in performance due to AI," said Oaktree Specialty Lending CEO Armen Panossian.

Ripple effects of software rout felt through asset managers

Feb 6 (Reuters) - Asset managers and private equity firms found themselves at the sharp end of the AI-driven shock hitting the software sector as investors fretted over exposure to loans and leverage tied to the industry. The pullback in software - which has wiped out nearly $1 trillion in market capitalization in those stocks - impacted asset managers, with the group as a whole hurt. The Dow Jones US Asset Managers Index is down nearly 5% for the week as of Friday afternoon versus the S&P 500 which is around flat. Individual names that sold off included Ares, Blackstone, Blue Owl, Carlyle, Apollo, TPG and KKR, which fell between 7% and 14% this week - recovering some ground in a rebound on Friday. "There are a few issues compounding the drawdown," said Mark Hackett, Nationwide chief market strategist in Philadelphia. "The trigger for the (private equity/business development corporation/asset management) stocks is driven by the software selloff and concern over loan exposure and leverage." Morgan Stanley pegged technology services deal volumes at nearly 21% of overall private-equity activity, noting that TPG Inc, Carlyle and KKR were slightly above that level, while Apollo was the lowest among the asset managers in its coverage. The AI trade had "subsumed parts of the market," said Wasif Latif, chief investment officer at Sarmaya Partners in New Jersey. "This is especially true for asset managers and PE (private equity) firms." With software stocks down 22% since January, loan-to-enterprise value (LTV) has increased for associated credits, raising concerns around default risk, BNP Paribas analysts Meghan Robson and Ben Cannon said in a note. LTV measures total debt against a company's total valuation. Software and services exposure is significantly larger in U.S. leveraged loans, around 17%, and 4% in the U.S. high yield loan market, the note said. In the private credit space, software exposure is about 20%, BNP estimated based on quarterly filings of specialized investment firms known as BDCs. LENDING EXPOSURE The non-bank lending sector, which includes private credit funds and esoteric vehicles such as collateralised loan obligations, has also become exposed to the software groups' declining growth and credit quality. Software borrowers are the biggest exposure for private lenders and the most highly indebted, while their revenue growth is also slowing, data from alternative credit analysis group KBRA published February 5 showed. With sales growth down to 10% from 18% a year ago because of factors including companies' delaying or cutting IT spending, private credit's software borrowers are also shouldering debt worth 7.4 times much as their profits measured before tax, interest and other deductions, on average, KBRA data showed. This compared to 5.9 times average leverage across a more than $1 trillion pool of loans studied by KBRA. One banker who works with asset management, who declined to be named, said alternative asset managers will face a test when they look to exit some investments, particularly in software. Managers of business development companies (BDCs), a key vehicle in private credit through which a fund raises money from investors to then lend directly to mid-sized companies, have been quizzed about software holdings. Ares executive Kort Schnabel said on a conference call on Wednesday that its business development company, Ares Capital Corporation, had "a very small amount of portfolio companies that could be disrupted." KKR Co-CEO Scott Nuttall told analysts on a conference call on Thursday that the firm had taken "an inventory of our portfolio the last two years" and identified whether AI was "an opportunity, or a threat, or a question mark." Blue Owl said its software portfolio represents 8% of total assets under management as it played down concerns following this week's selloff, while Carlyle said software accounted for 6% of its AUM. Speaking at a conference last week before the sell-off took hold, Blackstone President and Chief Operating Officer Jon Gray said AI disruption risk was "top of the page" for his firm, which manages assets worth $1.27 trillion. He said the safest way to play the AI megatrend was investing in data centers and surrounding infrastructure. Apollo declined to comment ahead of its quarterly results on Monday, while Blackstone and Blue Owl did not respond to Reuters' requests for comment. (Reporting by Medha Singh in Bengaluru, Chibuike Oguh, Isla Binnie, Saeed Azhar in New York, Amy-Jo Crowley and Naomi Rovnick in London; additional reporting by Avinash P, Editing by Megan Davies, Anousha Sakoui and Nick Zieminski)